UK Government Seeks to Limit Ofcom 40Mbps FTTC Broadband Price Cut

Ofcom’s proposal to force Openreach (BT) into significantly cutting the wholesale price of their ‘up to’ 40Mbps (10Mbps upload) FTTC “fibre broadband” product for ISPs has been dealt a blow after the Government warned it would “disincentivise investment” in new “full fibre” (FTTP/H) networks.

Earlier this year the regulator revealed, as part of their 2017 Wholesale Local Access Market Review, that they intended to impose a charge control upon Openreach’s 40Mbps tier (here and here) that would see the annual price gradually fall from £88.80 +vat per year to around £52.77 or £54.66 by 2020/21. The price is not yet set in stone as it’s dependent upon the plan for a 10Mbps Universal Service Obligation (USO).

The move was naturally welcomed by ISPs (e.g. Sky Broadband, TalkTalk) and would have also helped to encourage consumers off older ADSL services and on to the faster FTTC tier, which could similarly benefit the plans for a 10Mbps USO because a big part of that is likely to be based off fixed line VDSL2 technology (aka – Long Reach VDSL).

At the time we warned that Ofcom would have to tread very carefully because they run the risk of making FTTC so cheap that it could discourage investment in new / alternative / faster networks, which might struggle to compete against such low pricing. Lest we forget that both the Government and Ofcom are currently keen to encourage more coverage of ultrafast FTTH/P (example), especially via alternative networks (non-Openreach based).

A similar situation already exists in today’s market. Just under half of broadband lines in the UK are still based on slower pure copper ADSL based lines and that’s partly because they’re so cheap and not everybody sees the faster services (e.g. FTTC), which usually cost a few £ extra per month, as a necessary upgrade.

Now it would seem as if the Government’s Culture Secretary, Karen Bradley MP, has agreed and she told Ofcom as much in an open letter.

Karen Bradley’s Open Letter to Ofcom’s CEO (Sharon White)

Dear Sharon

I understand that Ofcom is in the process of consulting on the level of price reduction for certain superfast services, in order to correct Ofcom’s assessment that Openreach and BT are excessively profiting from the network.

It is important that unreasonable profits within the sector are addressed. However, I am concerned that price suppression could reduce demand for better services, such as fibre, and so will disincentivise investment in the network. Transformation of our existing networks to full fibre or other, more future proof, technologies will take many years. So, decisions made now have significant consequences for the future digital infrastructure of the UK and the economy that will depend on it. I appreciate that the 40/10 service is one of many on the market but it represents a wider issue as to whether the regulatory regime is at risk of not striking the right balance between ensuring appropriate consumer prices while driving necessary levels of long-term investment in the networks.

The National Infrastructure Commission intend to make this point in their interim National Infrastructure Assessment. At the point of writing, I am also expecting to receive a letter, jointly signed by Virgin, TechUK, Openreach and a number of the altnets, making the same point and questioning whether Ofcom is reaching the right decision.

In the Digital Communications Review, Ofcom stated it would “err on the side of caution with respect to investment incentives“. This is a position I share. High speed, reliable digital infrastructure is crucial for enabling our future digital economy. The UK must not be in a position in the future where our digital infrastructure cannot meet emergent demand. This is something we could examine for the Strategic Policy Statement (SPS).

With this in mind, I would be grateful for your view as to whether Ofcom is striking the right balance between keeping bills low for consumers and incentivising the necessary levels of investment in the UK’s digital infrastructure, for your current consultation and more broadly. I would also welcome your view as to whether Ofcom’s framework is constraining your ability to strike the right balance in any way. Finally, I would welcome your view as to whether there is merit at looking at new approaches to price reduction, such as reinvestment models, that can remove excess profits while driving investment in the networks.

Rt Hon Karen Bradley MP

Secretary of State for Digital, Culture, Media and Sport

Ofcom now faces an even more difficult balancing act between their desire to “protect consumers from high prices” and at the same time the need to assist with the Government’s aim of encouraging long-term investment and uptake of future ultrafast, full-fibre networks. Openreach will no doubt be pleased.

A spokesperson for Openreach told ISPreview.co.uk earlier this year, “On first viewing [Ofcom’s proposals] do not appear to incentivise more investment in ‘full fibre’ networks. The UK needs a regulatory framework that encourages investment and rewards risk. Building digital infrastructure is very expensive with long payback periods and we won’t recover our more than £3bn investment in fibre until after this charge control period.”